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Ukraine unrest sparks grain market speculation

Prolonged unrest in Ukraine could push grain prices higher, but Australia may only have limited capacity to capitalise.

Tara De Landgrafft

Grains industry analysts are closely watching the escalating situation in Ukraine, which could have a significant impact on the global markets.

Russian troops have moved into the eastern Ukrainian province of Crimea, on the Black Sea.

The Black Sea region is one of the world's most important grain production and export hubs; Ukraine alone grows close to the same amount of wheat as Australia, more than 20 million tonnes a year, although it exports around half of that, which is less than Australia. It's also becoming an increasingly important exporter of feed grains like corn and barley.

As a whole, the Black Sea region accounted for a little under a quarter of world wheat exports last year, according to to Ag Scientia analyst Lloyd George.

He says speculators in the grains futures markets started reacting to escalating tensions in Crimea before US trading closed on Friday, creating "conflict premiums" on some grains.

"The Crimea isn't an important grain exporting region for Ukraine, so it hasn't stopped grain exports immediately, but the concern would be that problems escalate and flow south, where it would start to impact grain flows," he said.

"The biggest concern at the moment would be corn; they've recently grown a corn crop of about 30 million tonnes, and about 20 million tonnes of that is expected to be exported.

"The export flow from that has only really just started in the past couple of months, so they've still got quite a bit to do over the next six or seven months.

"Markets have certainly escalated over there in the last few days, and they're starting to reflect conflict premiums."

Profarmer grain analyst Ron Storey says with the situation in Crimea still in its early days, it's not immediately clear what the impact on markets will be.

While he says there's no evidence of exporters defaulting on contracts at this stage, Mr Storey says the significance of the Black Sea region means any major disruption to the supply chain would be felt widely.

"Clearly as an importer from that part of the world, you'd be concerned about your future supplies of there were going to be interruptions," Mr Storey said.

"A lot of the Middle East nations that do import Ukrainian grain would be looking to make sure their supplies are uninterrupted.

"If it's going to go on for a little while, then I suspect it won't just be Ukraine [where supplies are disrupted], because politically, maybe people would look at sanctions on Russia if they're seen to be an offending party."

But Mr Storey says Australia's capacity to capitalise on higher prices for grain if Black Sea exporters do default on contracts is likely to be limited.

"Here in Australia, we've got a very full export program already booked right through until September-October of 2014," he said

"So the capacity of Australia to be able to respond with what I'll call 'nearby' shipments, to be able to pick up any shortfalls that might arise, is pretty limited because that shipping capacity is very fully booked.

"And of course we have a very tight supply situation on the east coast because of the drought in northern NSW and Queensland.

"But what it would mean is that grain that is unsold or unpriced, could likely achieve significantly higher prices if this unrest turns into some kind of interruption to grain supplies out of the Black Sea region."